There has been an improvement in the uptake of the Covid-19 credit guarantee scheme for small businesses whose operations have been negatively impacted by the virus and lockdown – with efforts underway to amend some of the qualifying criteria to further increase demand.
The scheme was launched in May. Deputy governor of the South African Reserve Bank (Sarb) Kuben Naidoo said two weeks ago that the initial uptake of the scheme was fairly low. He has now told Moneyweb that it has “increased significantly in the past week”.
He would not provide any details on how much more has been released from the reported R2-3 billion he said had been disbursed by each participating bank since the scheme was launched.
The Banking Association of South Africa would not comment on the figures ahead of its Covid-19 debt relief update.
The scheme is an initiative to provide up to R200 billion in largely government-guaranteed loans to small businesses with a turnover of less than R300 million for operational expenses such as salaries, rent and utilities. The first phase was launched with an initial R100 billion being made available to the market. This will be topped up based on demand.
Currently, the six participating banks through which loans are available are Absa, Mercantile Bank, First National Bank, Investec, Nedbank and Standard Bank.
“The Treasury and the banks are working on revisions to the scheme to try and further broaden the scope of the scheme to encourage even further take-up,” said Naidoo, adding that any amendments to the scheme are likely to be announced when Finance Minister Tito Mboweni tables his supplementary budget.
The Black Business Council is one of the institutions that has met with Treasury to discuss amendments to the scheme, due to the criteria not being sufficiently inclusive. One of the main proposals is the introduction of non-bank SMME funders that would be able to assist businesses that do not meet the commercial banks’ funding criteria.
Banks are expected to apply their normal risk evaluation and credit application processes when issuing loans, and may also ask borrowers to provide surety as well as other additional conditions they deem fit.
Stuart Theobald, chair of capital markets and financial services research house Intellidex, said the scheme came too late: nearly two months into lockdown, when some businesses were either closed or had found alternative funding.
The scheme that is in operation was influenced by Intellidex’s proposal for a bank guarantee scheme.
Theobald said the scheme also has onerous conditions and risks for entrepreneurs and that these will have to be removed to encourage greater uptake.
“Not many people are going to put their homes on the line when the outlook is so uncertain,” he said, commenting on the condition for applicants to provide personal suretyship to back their loans.
In addition, entrepreneurs are only allowed to use the loans for overheads and cannot use the money to pay dividends or repay shareholder loans, “which messes with people’s financial planning, particularly if they’ve been funding the business with loans to now”.
Delicate balancing act
“I think the government has to decide what it wants,” said Theobald.
“If it wants R200 billion of stimulus going into the economy it must tweak the scheme to get that out the door. If it wants it just to keep businesses from closing down, it can tweak less – but still needs [to] tweak.”
The condition of providing surety is one of the issues that is being looked at for possible revision, so that it does not disincentivise businesses that need the loans, said Naidoo.
He however added that the condition is applied in a discretionary manner by individual banks and, based on the feedback that the Sarb has received from the banks “it’s not a major obstacle to the take-up of the loan”.
“Design in a guarantee scheme is a delicate balance between getting the banks to lend more than they normally do, but you do not want them to take excessive credit risks for their own or the National Treasury’s balance sheet.”
How much is too much?
The risks on the loans are shared between the banks and Treasury, where banks are expected to shoulder 6% of the losses while the rest is covered by the government. But any losses will first be offset by the net margins earned from each bank’s loan portfolio of about 2%, followed by 0.5% guarantee fee charged by Treasury.
Theobald said banks have maintained existing credit risk processes, meaning in effect “the guarantee has not served to increase bank risk appetite”.
He said the government needs to set an explicit budget for the risk it is willing to accept from bad loans.
“The way the public accounts are done, with the R100 billion first phase seen as a contingent liability, the budget for losses currently is zero.
“Our view in our proposal was that these loans need to be prepared for a default rate of 20%. That implies R40 billion of losses on the full R200 billion scheme,” said Theobald.
Naidoo emphasised that the scheme has to be looked at in context. South Africa has never had a loan guarantee scheme where the government and the banks work together to extend loans to the public. Added to that was the short space of time that was available to develop and implement it.
“It has been implemented for about a month. We are learning lessons every day and we will make tweaks to the scheme to ensure its effectiveness and its usefulness,” he said.